Question

X Corporations outstanding bonds have a 5% coupon bond with 6 months remaining until maturity is currently trading at $992.2. . The company's after-tax cost of debt is__________%.

Answer 1

Using Financial Calculator

=RATE(nper,pmt,pv,fv)

where nper is Number of years i.e 1

Note : As given 6 months is remaining to maturity whch means 1/2 year and as semiannual Coupon rate is there we need to multiply 2 to 1/2 which is equal to 1 (1/2 * 2)

pmt is Interest payment i.e 1000 * 5.3% =53 / 2 = 26.50

pv is Current Market Price

= - 992.2

Note : pv should be taken as negative.

fv is face value i.e 1000

=RATE(1,26.50,-992.20,1000)

therefore ,Before tax cost of Debt is 3.456969% per 6 month or 6.913939 per annum (3.456969 * 2)

After tax cost of Debt = Before tax cost of Debt * (1 - Tax rate )

= 6.913939 * (1 - 0.30)

= 4.84% per annum.